Monetary reform: necessary, but how?
By Lance Crossley
(The last in a four-part monetary system series)
It is astonishing to see how little the idea of monetary reform is up for political debate. Nevertheless, there is a small but growing chorus of voices offering an alternative vision to our money system. Here are a few of the more realistic proposals I have encountered. While none is a panacea, each is capable of improving the current system.
Return Bank of Canada to its former glory
Canada’s central bank was created in 1935 and nationalized three years later. It is supposed to be owned by the public in the interest of the common good. In effect, however, it has become a vehicle of Bay Street bankers. It wasn’t always that way. From WW2 until the early 1970s, money creation was shared by the private banking system and the government (through the Bank of Canada). The central bank would lend government money with what amounted to an interest-free loan. This paid for massive undertakings like the war and costly infrastructure projects like airports and the Trans-Canada Highway. This “government created money” would eventually find its way into the private banks, which would then use the cash as its reserve base to lend to businesses and individuals. In the words of Paul Hellyer, a former Trudeau cabinet minister: “It was the system that gave Canada the best 25 years of the 20th century.”
The 100 per cent reserve system
The modern banking system is based upon the “fractional reserve” scheme created by the goldsmiths in the 17th century. For a small fee, goldsmiths held people’s gold in safes and provided the depositor with a receipt that was good as gold in the marketplace. The goldsmiths soon noticed that only 10-20 percent of their clients would redeem their gold at any one time. This meant they could “safely” lend gold at interest many more times over the amount they actually had in the vault – as long as they held at least 10 percent reserves. This deception worked as long as people trusted there was actual gold backing their paper receipt. Mandating a 100 percent reserve requirement on banks would take away their money creating privileges and prevent runs on banks like the one we witnessed last fall in the United States.
Bernard Lietaer, a former Belgian central banker, argues that people and corporations are actually competing for money, not markets and resources. That is why he and a growing number of activists are promoting the idea of local currencies, which can circumvent the need for legal tender. The idea is that as long as there is an agreement between two people, paper money doesn’t matter. For example, in Ithaca, New York, community members can use time credits to shop at the farmer’s market or even pay rent. Farmers and landlords can use the pledged “hours” to get help with the harvest or building maintenance.
While all of these ideas differ in their application, they share the common belief that the money system has gotten away from us and has become detrimental to the common good. Perhaps Lietaer says it best: “We’ve forgotten that we designed it, and it’s now leading us around.”